Protectionism and Trade Liberalisation Presentation

							International Economics
Trade, The Balance of Payments and
          Exchange Rates
Trade
 Buying and selling goods and services from
  other countries
 The purchase of goods and services from abroad
  that leads to an outflow of currency from the UK –
  Imports (M)
 The sale of goods and services to buyers from
  other countries leading to an inflow of currency to
  the UK – Exports (X)
The Flow of Currencies:

                Whisky sold to Italian hotel




Export earnings for UK
(Credit on Balance
of Payments)


                                          € changed to £


Map courtesy of http://www.theodora.com
The Flow of Currencies:

                                                Oil from Russia

                                                          Oil


 £ changed into Roubles                   Export earnings for Russia

   Import expenditure for the UK
   (Debit on balance of payments)




Map courtesy of http://www.theodora.com
Specialisation and Trade
 Different factor endowments mean some countries
  can produce goods and services more efficiently
  than others – specialisation is therefore possible:
 Absolute Advantage:
   – Where one country can produce goods with fewer
     resources than another
 Comparative Advantage:
  – Where one country can produce goods at a lower
    opportunity cost – it sacrifices less resources in
    production
The Terms of Trade
 The Terms of Trade looks at the relationship
  between the price received for exports and the
  amount of imports we are able to buy with that
  money.
                   Average Price of Exports
 Terms of Trade =      ---------------------------
                   Average Price of Imports
The Balance of Payments
 A record of the trade between the UK and the
  rest of the world.
 Trade in goods
 Trade in services
 Income flows
   = Current Account
 Transfer of funds and sale of assets and liabilities
  = Capital Account
Balance of Payments
Exchange Rates
 The rate at which one currency can be
  exchanged for another e.g.
 £1 = $1.59
 £1 = €1.15
 Important in trade
Exchange Rates
 Determinants of Exchange Rates:
 Exchange rates are determined by the demand for
  and the supply of currencies on the foreign
  exchange market
 The demand and supply of currencies is in turn
  determined by:
Exchange Rates
 Relative interest rates
 The demand for imports (D£)
 The demand for exports (S£)
 Investment opportunities
 Speculative sentiments
 Global trading patterns
 Changes in relative inflation rates
Exchange Rates
 A depreciation in exchange rate should lead to a
  rise in D for exports, a fall in demand for imports
  – the balance of payments should ‘improve’
 An appreciation of the exchange rate should lead
  to a fall in demand for exports and a rise in
  demand for imports – the balance of payments
  should get ‘worse’ BUT
  Exchange Rates
 Floating Exchange Rates:
   – Price determined only by demand and supply of the
      currency – no government intervention
 Fixed Exchange Rates:
   – The value of a currency fixed in relation to an anchor
      currency – not allowed to fluctuate
 Dirty Floating or Managed Exchange Rate:
   – rate influenced by government via central bank around a
      preferred rate
Exchange Rates
 Purchasing Power Parity (PPP)

 The relationship between the exchange rate and
  the price level in different countries.
   – The price of £ in the foreign currency = Foreign
     Country price level/UK price level
Protectionism
 Means by which trade between countries is
  restricted in some way – normally through
  measures to reduce the number of imports coming
  into
  a country
 Main means are:
   – Tariffs
   – Quotas
   – Non-Tariff Barriers
Protectionism
 Tariff: A tax on a good
  coming into a country
 Increases the price of the good and makes it
  less competitive
 Quota: Physical restriction
   on the number of goods
  coming into a country
    Impact of a Tariff on Steel
                               S + Tariff
Price of Steel                              S
(US $ per kg)



           28                      Amount of the tariff per unit



           20




                                                D

                   350   500                    Quantity of Steel Bought and
                                                Sold from Abroad
    Impact of a Quota on Steel
Price of Steel     Quota         S
(US $ per Kg)
                   level
                                           Pre-trade
                                         The quota restricts
           30                              position to a set
                                         the supplybefore
                                           a quota.
                                         amount (250 in
                                         the example)
                                         which is likely to
                                         result in a
           20                            shortage of this
                                         good and a
                                         subsequent rise in
                                         its price.



                                     D

                 250       500       Quantity of Steel Bought and
                                     Sold from Abroad
Non-Tariff Barriers

 Any methods not covered by a tariff,
  most usually:
  – Rules
  – Regulations
  – Voluntary Export Restraints (VERs)
  – Legislation
  – Exacting Standards or Specifications
Non-Tariff Barriers
 Examples include setting exacting standards on fuel
  emissions from cars, the documentation required to be able
  to sell drugs in different countries, the ingredients in
  products – some of which may be banned in the destination
  country
 NTBs are difficult to prove – when do you accuse a
  country of protectionism – could be
  a legal or cultural issue?
 The main method involved in NTBs is not
  to prevent trade but to make the cost of doing so
  prohibitive to the potential exporter
Reasons for protectionism

 Protect domestic industries
 Protect domestic employment
 Strategic reasons
 Political pressures
 Protect culture?
 Prevent ‘Dumping’ – selling goods
  in the destination country below cost
  to break into that market